The EB-5 debate
Virginia Beach developer angles for foreign investors to build Asia Town
Kathy Owens has a vision to build a mini-Chinatown in Virginia Beach. Fittingly, she hopes foreign investors will help pay for the bricks and mortar.
Known as Asia Town, the 10.6-acre development proposed for a site on Holland Road in the Princess Anne area, would feature a mix of uses, including restaurants, retail shops and business offices. Owens, president of Beach Development Group, says construction will begin in 2014, assuming the federal government approves her request to establish a regional center to attract visa-seeking immigrant investors. Beach Development Group also built Kate’s Corner at Town Center, an office building on Euclid Road in Virginia Beach. Asia Town would be its most ambitious project to date.
Owens’ company filed an application with the U.S. Citizenship and Immigration Service (USCIS) in 2011 seeking designation as a regional center under the agency’s Immigrant Investor Program, more commonly known as EB-5. The name refers to the fifth of five federal employment-based methods by which an immigrant to the U.S. may obtain a visa. The EB-5 program provides visas to foreigners who invest at least $1 million in ventures that create American jobs.
If EB-5 sounds familiar, it’s probably because the term has been in the news alot in this year’s gubernatorial election. Republican political operatives are critical of Virginia Democratic gubernatorial candidate Terry McAuliffe and the attempted use of EB-5 funding to launch GreenTech Automotive, an automobile manufacturing facility in Mississippi. GreenTech planned to open an assembly plant in 2012 — initially Virginia was in the running — but the project was slow to get off the ground, tarnishing McAuliffe’s claims of being a job creator. Now, the Department of Homeland Security is looking into allegations that a federal immigration government official, Alejandro Mayorkas, assisted a GreenTech affiliate with its efforts to pursue foreign-investor visas.
Also, The Washington Post reported in early August that the Securities and Exchange Commission is investigating GreenTech, focusing on alleged claims of “guaranteed returns” to investors.
Since 1992 EB-5 investors have generated nearly $7 billion in direct investment in U.S. companies, producing 177,000 new jobs, according to the Association to Invest in USA (IIUSA), a Chicago-based trade group. To date, though, Virginia has missed out; although several EB-5-approved regional centers exist here, all are investing in economic development projects outside the state, according to experts familiar with the program.
Owens says her application would create the “first regional center focused on Virginia,” dubbed the Virginia Atlantic Regional Center, or VARC.
“This is a shovel-ready project; we’re just waiting on the feds. It will have a significant impact for Hampton Roads and a ripple effect on 35 counties in Virginia and part of North Carolina,” Owens says.
Unlike traditional models, Asia Town is not looking to land a major “big box” retailer as an anchor. Instead, Asia Town will feature boutique shops and eateries that cater to the 7 percent of Hampton Roads residents of Asian descent, Owens says.
Three buildings are planned for retail occupancy, along with a four-story office complex. If developed and operated as planned, Asia Town would generate nearly $133 million of increased economic activity in Virginia and create more than 400 jobs within its first four years, according to an analysis of the project by Economic and Policy Resources Inc., a consulting firm in Williston, Vt., hired by Owens’ company.
Owens wants to attract at least nine foreign investors to pony up $1 million each. That will cover a good chunk of the project’s estimated $14.5 million development costs. She says TowneBank has provided a bank letter of interest to finance the bank portion of the project, contingent on raising the EB-5 capital. Also, a formal agreement is in place with SunTrust to manage the investors’ escrow accounts.
Congress approved the EB-5 program in 1990 as a way to generate direct investment in the U.S. by foreign nationals. Under proposed immigration-reform legislation in Congress, EB-5 may be permanently authorized, replacing the periodic reauthorization now required. Here’s how the program works: In exchange for sinking a minimum of $1 million in a new U.S. business, federally qualified EB-5 foreign investors receive a green card for themselves and their immediate family members. The proviso: the foreign capital must “create or preserve” at least 10 full-time U.S. jobs within two years after the immigrant achieves conditional residency, according to USCIS program rules.
Still, it’s hardly a fast-track program. Of the four regional centers whose geography includes Virginia, only one, D.C. Regional Center, received approval of foreign investors between 2010 and 2012, according to the IIUSA.
“You haven’t had too much direct action in Virginia, but you will soon if Kathy’s proposal gets approval,” says Peter D. Joseph, the IIUSA’s executive director.
Joseph says he’s frustrated by the lack of available federal data on how individual states benefit from EB-5 investments. Most of the U.S. impact is isolated in large states, notably California, Florida, New York and Washington state. His agency is preparing the first report to provide a state-by-state breakdown, expected to be available later this year.
Some EB-5 centers prefer to maintain a low profile. Westmill Capital manages a USCIS-approved regional center focused in investments in the metropolitan Washington, D.C., area. Company officials initially agreed to discuss their program, only to subsequently decline comment through a spokesperson.
Other EB-5 centers have generated headlines — and controversy. GreenTech Automotive sought EB-5 investors through the Virginia Center for Foreign Investment and Job Creation in McLean. Its registered agent is Anthony Rodham, brother of former Secretary of State Hillary Rodham Clinton.
Originally, GreenTech sought the money in conjunction with a plan to build an auto-manufacturing plant on sites it was considering in Waverly, Danville and Martinsville. However, the company eventually chose to locate the plant in Mississippi. Documents have surfaced in which officials at the Virginia Economic Development Partnership expressed “grave doubts about the business model” presented by GreenTech and concern that “having the principals of the Regional Center be the same as the principals of the company benefiting from the investment creates a conflict of interest.”
The plant’s failure to materialize here is being used by Republican opponent Ken Cuccinelli, Virginia’s attorney general, to cast doubts on McAuliffe’s gubernatorial bid, which is oriented on a campaign theme of “putting jobs first.”
Politics aside, in some ways Virginia is a victim of its own success. The lack of EB-5 investment capital is partly attributable to strong and steady economic growth, experts say. The minimum investment is lowered to $500,000 if it’s made in an area with an unemployment rate that is at least 150 percent of the prevailing national rate.
“Virginia is a very prosperous state, and it’s hard to find an area where unemployment is that high,” says Eliot Norman, an attorney with Williams Mullen in Richmond.
Plus, foreign investors typically are less interested in projects that are highly leveraged with EB-5 money. “They want to invest in areas where other Americans are already investing,” Norman says.
Global Capital Markets Advisors, an Alexandria-based company that manages real estate investment funds, uses EB-5-related investors as one tool in its arsenal, says Michael Sears, its managing principal. His company runs the Capitol Area Regional Center and uses it to solicit overseas investors in new real estate projects. Although its geographic area includes Virginia, Sears says his company’s EB-5 investments are isolated in Washington, D.C., and Maryland.
Sears says the impact of the immigrant investor program is less now than it was just a few years ago, largely due to a profusion of newly approved EB-5 centers across the U.S. That’s why his company uses EB-5 selectively. “Frankly, 90 percent of the EB-5 deals flooding the market now are junk,” Sears says.
Critics of the EB-5 program also caution that it’s not a slam-dunk for investors. Like any prospective investment, EB-5 projects need to be vetted thoroughly, although that can be difficult for people who don’t live in the U.S.
“Developers sometimes use the EB-5 program to make it sound like an investment has the government’s approval. We have heard horror stories in which Chinese families pooled their money to send a child to college in the U.S., only to find out they don’t have a controlling interest in the company, and their investment is illiquid,” says Rick Fleming, deputy general counsel for the North American Securities Administrators Association in Washington, D.C.
Indeed, immigration officials are rewriting the rules for approving EB-5 investors. The SEC and USCIS reportedly are giving heightened scrutiny to the program after a scandal this year in which a Chicago-area EB-5 regional center fraudulently sold $145 million in real estate securities to 250 Chinese investors.
The bad behavior of scammers causes frustrating delays for legitimate developers like Owens. Beach Development Group lodged a formal complaint last year with the USCIS over the slow pace. Owens says she finally heard from USCIS officials in May and is hopeful a decision on her EB-5 application will come by summer’s end.
Getting EB-5 approval is critical to building Asia Town. “I’ve pitched this project to many developers, but without a big-box retailer as an anchor tenant, it doesn’t fit their model for economic development. That explains why all retail strip malls look the same. Asia Town is going to be very different and unique,” Owens says.